1. Field of the Invention
The present invention generally relates to portfolio analysis. More particularly, the invention relates to forecasting a distribution of possible future values for an investment portfolio.
2. Background Information
An investor has numerous investment options. Examples of investment options include stocks, bonds, commodities, etc. In general, investors desire for their investments to achieve returns that are acceptable to the investors. How best to invest one's money to achieve desired results is an age-old dilemma.
To a certain extent, modern investment theories are generally based on the work of Nobel Laureate Harry Markowitz. Markowitz developed and published a solution to the following problem: Given a set of n stocks and a capital to be invested of C, what is the allocation of capital that maximizes the expected return, at a future time t, of the portfolio for an acceptable volatility of the total portfolio?
Quantifying “volatility” has been defined in different ways. One definition of volatility is the square root of the variance of the value of a portfolio (typically designated by the Greek letter sigma, σ). A problem with using σ as a surrogate for volatility is that many investors have no particular “feel” for what σ means. Consequently, many investors have no idea as to what value of σ is appropriate for them. In short, even if the theory offered by Markowitz is sound, it may be difficult to implement in a practical way. A different approach to portfolio analysis is needed that addresses this issue.